IFRS 17: A guide for insurers

In the early months of 2024, actuarial and finance teams across insurers completed their first full annual financial statements prepared under IFRS 17. For many of those teams, in our view, it was the most consequential reporting change in two decades. Profit that would once have been booked on day one now sits on the balance sheet as a liability, released only as cover is provided. Insurance liabilities went up, and shareholders’ equity came down.

That’s not because those insurers were doing worse. It is IFRS 17 spreading the profit out over the life of an insurance policy and recognising it gradually, year by year. That single change, holding profit back as a liability and releasing it as cover is provided, is the idea the rest of IFRS 17 is built around.¹

Why IFRS 4 had to go

IFRS 4 was designed to be an interim accounting standard, and the International Accounting Standards Board (IASB) said so at the time: it planned the work in two phases, of which "Phase 1, completed in 2004 by issuing IFRS 4 Insurance Contracts, focused on enhanced disclosure of the amount, timing and uncertainty of future cash flows from insurance contracts", leaving the measurement question to phase two.²

IFRS 4 defined what an insurance contract was, but didn’t mention how to account for one. Entities were free to apply local standards, which allowed a wide variety of practices, including measurement approaches that were inconsistent across contracts within the same entity and almost incomparable across entities in different jurisdictions. On that basis two insurers writing similar life policies could present materially different balance sheets and income statements, and IFRS 4 did not require either of them to reconcile the difference.

That inconsistency is what made the fix worth twenty years of work. IFRS 17, issued in May 2017 and effective from 1 January 2023, replaced IFRS 4 with a single consistent model.³ The IASB’s predecessor, the International Accounting Standards Committee, had begun a project on insurance contracts as long ago as 1997.²

What are the three IFRS 17 measurement models?

IFRS 17 does not impose a single calculation method on all insurance contracts. It defines three models, with the choice determined by the nature of the contract. All three measure the same thing, the value of the insurer’s remaining obligation, but they do not all decompose it the same way. The general measurement model and the variable fee approach split that obligation into fulfilment cash flows, a risk adjustment and an unearned profit component. The premium allocation approach drops the split for the liability for remaining coverage and carries a single undecomposed balance instead, which is precisely where its simplification comes from.

What is the general measurement model (GMM)?

The general measurement model (GMM), also called the building block approach, is the default method under IFRS 17.

What is the variable fee approach (VFA)?

The variable fee approach is a method for insurance products that work a bit like an investment fund with an insurance wrapper. The insurer manages a pool of assets on the customer’s behalf and takes a fee for doing so. When those assets go up or down in value, this approach puts the change into a reserve (the contractual service margin) rather than the profit and loss account. This keeps things balanced, because otherwise the way the insurer values what it owes wouldn’t match the way it values what it holds.

What is the premium allocation approach (PAA)?

The premium allocation approach is a shortcut for short-term insurance contracts, usually a year or less, or any contract where the simpler method wouldn’t give a materially different answer from the GMM. It works much like the old unearned premium reserve. Say a customer pays £1,200 upfront for twelve months of cover. After three months, the insurer has provided a quarter of that cover, so £300 counts as earned and is recognised as revenue, while the remaining £900 stays on the books as a liability for the cover still to come. The European Insurance and Occupational Pensions Authority (EIOPA) found the PAA predominant for non-life business, as the variable fee approach is for life.³ But once a claim has actually happened, the insurer has to work out what it owes using the GMM.

CSM: Profit as liability

The contractual service margin (CSM) is the most distinctive of IFRS 17’s building blocks, and the one with the deepest implications for actuarial practice. When a contract is written, an insurer can’t book any of the profit straight away. The CSM holds that expected profit back as a liability, then releases it gradually into revenue as cover is provided over the life of the contract. Losses work differently. If a contract is expected to be loss-making from the start, that loss hits the income statement immediately, with no deferral.

Take a 10-year, £500,000 sum insured term assurance contract as an example of how the general measurement model (GMM) arrives at that CSM figure. At initial recognition, the insurer estimates the present value of future premiums at £550,000, the present value of future claims and expenses at £400,000, and a risk adjustment for non-financial risk of £30,000. This comes to a net inflow of £120,000 and the contract is expected to be profitable on a risk-adjusted basis. That expected profit becomes the CSM, calibrated so the insurance contract liability value is zero at inception. The CSM then releases at roughly £12,000 a year over the contract term.

A later improvement in mortality assumptions, for example, would change the CSM balance rather than flow through the income statement directly, with the revised amount spread over the years still to run. The roll-forward runs in five steps: the opening balance, plus new contracts written in the period, plus or minus re-estimates of future coverage, less the amount released to revenue, giving the closing balance. Release is proportional to the coverage units delivered in the period, so the profit follows the service.

Run the same 10-year, £500,000 term assurance contract through IFRS 4, and the £120,000 net inflow could have been booked as profit on day one. The CSM exists to stop exactly that. IFRS 4 never prescribed a model of its own.

Under the prudent reserving basis, often called a gross premium valuation, there was no separately disclosed risk adjustment. The margin was folded into the assumptions themselves: carry the same £400,000 of claims and expenses with a £30,000 prudential margin inside the mortality basis and the reserve lands around £430,000, with nothing on the face of the accounts to say how much of it is margin. That gross premium valuation example is the principle simplified heavily, not a description of any particular firm’s method. IFRS 4 didn’t require the liability to net down to zero at inception, so the £120,000 gap between premiums and reserve wasn’t systematically deferred. Depending on the insurer’s accounting policy, some or all of it could reach the income statement straight away.

Assumption changes behaved differently too. A prudent reserve simply strengthens or releases as assumptions move, and the full impact lands in the income statement in the period identified. IFRS 17 splits the impact of an assumption change in two. Changes relating to future service adjust the CSM. Changes relating to service already delivered do not.

Why IFRS 17 has not settled into a stable interpretation

IFRS 17 has not settled into a stable interpretation. EIOPA’s 2024 review covered 53 groups from 17 member states, out of 121 groups reporting under IFRS, and found wide variation in discount-rate construction, risk-adjustment calibration and contractual service margin policy.³ Two figures give the range its shape. On discount rates, 42% of respondents used the same rate as Solvency II or within 0.1% of it, while the other 58% did not. On the risk adjustment, firms chose confidence levels usually between 75 and 85%, averaging around 80. IFRS 17’s principles-based design made that variation predictable, and it still leaves analysts struggling to compare one insurer with another.

In the United Kingdom, HM Treasury and the Government Actuary’s Department brought IFRS 17 into the Government Financial Reporting Manual from 1 April 2025, extending the standard’s reach to central government entities that issue insurance contracts.⁴

For insurers who have passed the transition, the pressure now is to build the controls and documentation the standard demands. The accounting change explains why those first IFRS 17 balance sheets showed lower equity; the model governance work behind them has only just begun.

Frequently asked questions